Managed accounts beat single-premium immediate annuities over the long run.
That’s the conclusion of a study posted on the Social Science Research Network. The paper, “Lifetime Expected Income Breakeven Comparison Between SPIAs and Managed Portfolio,” was written by Larry R Frank Sr., a Registered Investment Adviser in California, John B. Mitchell, Department of Finance and Law at Central Michigan University, and Wade Pfau, Professor of Retirement Income at The American College.
Financial advisors usually recommend that people annuitize all or some of their retirement assets so they have some guaranteed income if they live longer than expected. Authors of the report wanted to find out whether that was the best advice.
When people retire, there can be a lot of uncertainty around whether they should keep their assets in a managed portfolio or buy an annuity.
The study compared SPIAs (single-premium immediate annuities) with managed portfolios to see which option produces the best results for pre-retirees and retirees.
It found that continuing to manage a portfolio of stocks and bonds produces a higher amount of income in the long run than purchasing an SPIA.
SPIAs pay out more than managed portfolios at first, but over time managed accounts deliver a greater real — inflation-adjusted — sum of money, even after factoring in different asset allocations.